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HomeMy WebLinkAbout5 2006 Audit Report Agenda Item # 5 UCKEE DONNER u b_ ' cI Utility District I Public � I Memorandum To: Board of Directors From: Mary Chapman Date: April 27, 2007 Subject: Presentation of the 2006 Audit Report This is the second year Virchow Krause & company LLP accounting firm has performed the District audit. The 2006 audit is now complete and ready to be presented to the Board of Directors. Tom Unke will be at the Board meeting to go over the results of the audit which includes drafts of the Financial Statement and the Primary Government Only Financial Statement for the year ended December 31, 2006. Tom will also present the management letter. Attached are copies of all these documents for your review. Recommendation I recommend that after review of the audit reports, if the Board finds everything in order, that you adopt the report for 2006. 9 VirchOrwSe &company April 25, 2006 Ms. Mary Chapman Truckee Donner Public Utility District 11570 Donner Pass Road PO Box 309 Truckee, CA 96160 Dear Mary: Enclosed are ten (10) rough draft copies of the Truckee Donner Public Utility District's Financial Statements and the Primary Government Only Financial Statements for the year ended December 31, 2006 for your review. Also enclosed are ten (10) rough draft copies of the management letter for the year ended December 31, 2006. Sincerely, VIRCHOW, KRAUSE & COMPANY, LLP Thomas E Unke, CPA, Partner TEU/dh Enclosures R 6i)c (.L, -T\-v �-L) L,� � new I Ten Terrace Court PO Box 7398 Madison, WI 53707-7398 • Tel 608,249.6622 Fax 608.249.8532 www.virchowkrause.com Virchow, Krause & Company, LLP Certified Public Accountants&Consultants •An Independent Member of Baker Tilly International PA OPPF� <5 5 A April _, 2007 O Truckee Donner Public Util strict 11570 Donner Pass Road PO Box 309 Truckee, CA 96160 Dear Board Members: We are presenting for your consideration our comments and recommendations on the system of internal control and other operating matters. These matters came to our attention during our audit of the financial statements of Truckee Donner Public Utility District (district) for the year ended December 31, 2006 and 2005, which we reported upon on April_, 2007. This letter, by its nature, focuses on improvements and does not comment on the many strong areas of the district's systems and procedures. The comments and suggestions on the attached report are not intended to reflect in any way on the integrity or ability of the personnel of the district. They are made solely in the interest of establishing sound internal control practices and improving the district's operations. This report is intended solely for the information and use of the directors and management and is not intended to be and should not be used by anyone other than these specified parties. NEW ACCOUNTING STANDARDS STATEMENT ON AUDITING STANDARDS(SAS) NO. 103 As part of our audit of your financial statements for the year ended December 31, 2006, we were required to follow a significant new auditing standard, or rule. The new standard establishes standards and provides guidance to an auditor on audit documentation. Audit documentation is an essential element of audit quality. Although audit documentation alone does not guarantee audit quality, the process of preparing sufficient and appropriate audit documentation contributes to the quality of an audit. How does this impact the district? As auditors, we still have the same responsibility as we did in the past. Now we are required to document our efforts in new ways. For example, the new rule requires that we date our audit opinion when we are ready to release the final reports. In the past, .we were required to date the opinion as of the last day we did fieldwork at your office. You will notice that the date at the lower left of our opinion is now later in the year than it used to be. This change is significant because we are also required to do many of our audit procedures through the date of our opinion. The new rule requires us to perform a number of inquiries and do procedures for several weeks to several months past the old date. This, of course, requires more time to do the audit, and may cause some timing problems with issuing the final audited documents. The new standard is supposed to benefit you and the public with financial statements that have less risk of unidentified significant events occurring after year end, but not being disclosed in the statements. �F1 G�Sg\ Truckee Donner Publi UtQb�jr Di 'ct April _, 2007 Page 2 NEW ACCOUNTING STANDARDS (cont.) NEW INTERNAL CONTROL AUDIT TESTING FOR 2007 In March of 2006, the American Institute of Certified Public Accountants issued eight new auditing standards (#104-111) that will change the way auditors approach the audit process. These changes are a direct result of the major frauds that have occurred in the United States in the past several years. The new standards are intended to improve the auditors' understanding of you, the client, the environment in which you operate, your internal controls, and the risks involved in the audit. The auditor will be required to make a more rigorous assessment of the risk of material misstatements based on that understanding. The result will be improved linkage between the assessed risks, and the nature, timing, and extent of our audit procedures. One of the concepts that affects most units of governments is the level of documentation of their internal controls. Most of our clients do not have adequate written documentation of the various internal control processes that take place within their organization. We, as auditors, have done some amount of high level documentation of your processes for our files. You, on the other hand, should theoretically have all of your major processes contained in written documents in enough detail that another person could come in and fulfill the requirements of a particular process by following the explanations. The major areas that should be documented are: Cash Receipts Inventories Cash Disbursements Capital Assets — Additions and Retirements Investment Transactions Capital Assets — Depreciation Receivables — Billings Debt Transactions Receivables — Collections Payroll Purchasing Financial Reporting Receiving Information Technology Other than the computer software instruction manual, many of our clients have little written documentation covering these areas. We understand that you have many of these process documented, however we encourage you to review this documentation at this time to ensure that recent changes in personnel and responsibilities are reflected. For the current and past audits, we have been able to complete your audit without asking for such documentation. However, beginning with your calendar year 2007 audit, we will be required to ask you for complete documentation of your internal control systems, due to the new auditing standards. Therefore, you should plan now to complete that documentation during 2007, so that we can evaluate your compliance with the new rules during our audit of your 2007 financial statements. We are available to discuss the details of these requirements with management as you begin your review process. ,Pgc Truckee Donner P is &tility April_, 2007 Page 3 NEW ACCOUNTING STANDARDS (cont.) COMMUNICATION OF INTERNAL CONTROLS Recently a new auditing standard was issued that focuses on internal control, and what we communicate to you regarding your controls. Those requirements are set out in Statement in Auditing Standards No. 112, "Communicating Internal Control Matters Identified in an Audit." The new standard clarifies some definitions and will promote more consistency in how weak areas in internal control are communicated by auditors to their clients. How does this affect the district? The new standard required us to review many factors to determine if a material weakness exists within your organization. There are three factors in particular which will require us to report a material weakness that affects many governments. • Internal Control Documentation - there is a lack of complete documentation of your system of internal control, • Financial Reporting-the auditor finds material journal entries not detected by the client, • Financial Reporting-the auditor prepares the annual financial statements and footnotes for the client. Internal Control Documentation Many of our clients do not have adequate written documentation of the various internal control processes that take place within their organization. You should have all of your major processes contained in written documents in enough detail that another person could come in and fulfill the requirements of a particular process by following the explanations. Absence of this documentation results in a material weakness in your internal control. Financial Reporting The new standard makes it clear that the definition of a material weakness in internal control should now include consideration of the year end financial reporting process. To avoid the auditor reporting a material weakness in internal control, your system of controls would need to be able to accomplish the following: • Present the books and records to the auditor in such a condition that the auditor is not able to identify ony material journal entries as a result of our audit procedures. This is very rare for most of our clients. • Prepare a complete set of year end financial statements with a very high level of accuracy. The new standard requires that the level of accuracy be such that there is only a remote likelihood that the auditor will discover a material change to the statements or footnotes. While a number of our clients prepare their own statements, it may not be cost beneficial to scrutinize those statements internally to the same degree that the auditor will do later. If the auditor, therefore, discovers a material change to the statements, by definition, the system of internal control over financial reporting must have a material weakness. wall , Truckee Donner Publ c Utilp ity Di tr P+J D�S c'�S `f April _, 2007 p�dl, ' Page 4 NEW ACCOUNTING STANDARDS (cont.) COMMUNICATION OF INTERNAL CONTROLS (cont.) Financial Reporting(cont.) To accomplish such a high level of internal control over financial reporting is a difficult task for most governments. Many large organizations, such as SEC companies, have been required by law to prepare their own statements for years, and are staffed appropriately to do so. Most governments operate with only enough staff to process monthly transactions and reports, and so rely on us to prepare certain year end audit entries and handle the year end financial reporting. Under the new auditing standards, we must, therefore, inform you that these are material weaknesses in your internal control. If you have any questions on these new disclosures, please contact your audit team. GASB NO. 49 — ACCOUNTING AND FINANCIAL REPORTING FOR POLLUTION REMEDIATION OBLIGATIONS The Governmental Accounting Standards Board (GASB) issued Statement No. 49 that addresses accounting and financial reporting standards for pollution, including contamination, remediation obligations. This standard outlines five obligating events which trigger the requirement to estimate the future pollution remediation outlays using the expected cash flows measurement technique and report the liability in the financial statements. In addition, information about the pollution clean up efforts is required to be disclosed in the footnotes to the financial statements. This standard becomes effective January 1, 2008. At this time we are not aware of any pollution remediation liabilities that the district will be required to record, however management should be aware of this new standard and the obligating events in the future. ENHANCEMENT TO FINANCIAL REPORTING AND INTERNAL CONTROLS DOCUMENTATION OF AUTOMATED OVERHEAD ALLOCATION PROCESS During 2006 district staff and management dedicated a significant effort to improving the work order process. This included implementing a monthly closing and reconciliation process as well as implementing several process efficiencies. One of these efficiencies was to automate the overhead allocation process, or allow the work order system to allocate overheads each month based on the total overhead costs and the total work order charges for the month. This eliminates a significant amount of staff effort to manually calculate this allocation monthly. We recommend that staff develop documentation for this automated allocation process including how the total overhead costs are accumulated and what the basis for the allocation to each work order is and develop a process to review this monthly to ensure that the allocations prepared by the system are consistent and reasonable. ' PF{ELItV11NPFiY pR�t" , FOR ry P'J�Pv�F Truckee Donner Publi Uti�%W5 p April _, 2007 Page 5 ENHANCEMENT TO FINANCIAL REPORTING AND INTERNAL CONTROLS (cont.) MONTHLY FINANCIAL REPORTING FOR ONGOING DISTRICT MANAGEMENT As the board has the ultimate responsibility for the finances of the district we commend the board members for their desire to review detailed reports on a monthly basis however we also understand that there can be a lot of information included for a utility the size of the district. It is important for the board to review the disbursement records and feel comfortable with the purpose and payees included on these records. Beyond that, however, may governing bodies struggle with what information provides the best analysis with the limited amount of time the members have available for review. We would recommend two types of monthly reports be considered. The first is a budget to actual or variance analysis. This report would look at significant categories of revenues and expenses and compare the monthly activity and the year to date activity to the district budget and provide explanations for variances over a pre-determined threshold. For example, revenues may vary due to usage patterns or changes in the number of customers. The kwh or gallon or customer number changes can be provided to support the change in revenues from the budgeted expectation. Similarly, if distribution expenses are lower than budgeted as the result of a mild winter and less overtime required for line repairs that fact would be noted. Again, this report would be at higher level, not an account by account level. The second type of report that can be very beneficial to the board is an executive analysis type report. This would be a standard report that includes key ratios and metrics for financial stability. This report could include items such as unrestricted funds on hand and the number of months of operating costs that these would cover, restricted fund balances and a comparison to required funding, debt coverage ratios, operating revenues or expenses per full time equivalent, customer or kwh or gallon. Historical information could be used to create benchmarks for the district in each of these areas which would allow management to see quickly if current operations are meeting the desired expectations in these key areas or not. PRIOR YEAR COMMENTS AND STATUS GASB No. 40-DEPOSITS AND INVESTMENT RISK DISCLOSURES During 2005 the district was required to implement GASB No. 40 which dictates several investment risk disclosures in the financial statements. We recommended that the district adopt a formal investment policy which addressed custodial credit risk, credit risk, interest rate risk and concentration of credit risk. We noted that a new investment policy which addresses these risks was adopted in 2006. GASB No. 45 - ACCOUNTING AND FINANCIAL REPORTING BY EMPLOYERS FOR POSTEMPLOYMENT BENEFITS OTHER THAN PENSIONS The Governmental Accounting Standards Board (GASB) issued Statement No. 45 that establishes standards for the measurement, recognition, and display of other post employment benefits (OPEB) expenditures and related liabilities and/or assets, note disclosures, and, if applicable, required supplementary information in the financial reports of state and local governmental employers. The district has completed the initial study of the impact of this new standard on its financial reporting and has begun to implement the standard in early 2007. The district still needs to select a trustee for the funding of this obligation. ' pREl.1MlN�R�pRAFS c5D0 Ps�t,OvES Truckee Donner Public Uti ity p� April _, 2007 Page 6 PRIOR YEAR COMMENTS AND STATUS (cont.) IMPROVED GOVERNANCE THROUGH ALTERNATIVE FINANCIAL REPORTING OPTIONS Although the district is required to present the community facility districts as blended component units under GASB 14 we understand that for certain management and external reporting functions it may be more beneficial to exclude these entities and focus on the financial position of the primary government. For 2006 management has chosen to prepare two separate financial reports, one for the entire district and one for the primary government only. SEGREGATED TREATMENT OF FIBER OPTIC ASSETS The district has several non-utility assets in the electric utility related to the fiber optic venture. We understand that the creation of a fiber optic department and purchase or lease of these assets from the electric utility has not been determined. We recommended that management and the board continue to track these assets and consider separate treatment as non-utility property rather than electric inventory and work in progress. The district intends to re-evaluate which assets should be owned by the electric utility and which should be transferred to a separate department as they discuss how to move forward with a broadband department in 2007. JOURNAL ENTRY DOCUMENTATION AND REVIEW During our 2005 audit, we noted that not all journal entries were reviewed and approved by someone other than the preparer. We noted that all journal entries were reviewed by a second person during 2006. CLOSING OF WORK ORDERS AND ELIMINATION OF DUPLICATE EFFORT We recommended that management continue to streamline the work order closing process to ensure that costs are transferred to plant in service upon completion and contributions are recognized as revenue in a timely manner. In addition we suggested that management determine what reporting functionality was available from the work order system in order to eliminate the time consuming spreadsheets that were being used to track costs. During 2006 management was able to obtain a work order summary report from the system to replace the spreadsheet and continued to close out work orders throughout the year as completed. INCREASED PROTECTION THROUGH EMPLOYEE BONDING During the 2005 audit we recommended that the district review with its risk management advisor the level of bonding required for the safeguarding of district assets. As of December 31, 2006 bonding had been obtained through the insurance agent. IMPLEMENTATION OF CODE OF BUSINESS CONDUCT We recommended that the district consider implementing a written standard code of business conduct for their employees to formalize the overall attitude and integrity that is desired among district personnel. We noted that a code of contact has been approved and is being communicated to all employees. � pp��L1M 10, Truckee Donner Public U flity Distr�SS1O�p1,31R S April _, 2007 D1SG O1`11�Y Page 7 INTERNAL CONTROLS In planning and performing our audit of the financial statements of the Truckee Donner Public Utility District (district) as of and for the year ended December 31, 2006, in accordance with auditing standards generally accepted in the United States of America, we considered its internal control over financial reporting (internal control) as a basis for designing our auditing procedures for the purpose of expressing our opinion(s) on the financial statements, but not for the purpose of expressing an opinion on the effectiveness of its internal control. Accordingly, we do not express an opinion on the effectiveness of its internal control. Our consideration of the district's internal control was for the limited purpose described in the preceding paragraph and would not necessarily identify all deficiencies in internal control that might be significant deficiencies or material weaknesses. However, as discussed below, we identified certain deficiencies in internal control that we consider to be material weaknesses. A control deficiency exists when the design or operation of a control does not allow management or employees, in the normal course of performing their assigned functions, to prevent or detect misstatements on a timely basis. A significant deficiency is a control deficiency, or combination of control deficiencies, that adversely affects the entity's ability to initiate, authorize, record, process, or report financial data reliably in accordance with generally accepted accounting principles such that there is more than a remote likelihood that a misstatement of the entity's financial statements that is more than inconsequential will not be prevented or detected by the entity's internal control A material weakness is a significant deficiency, or combination of significant deficiencies, that results in more than a remote likelihood that a material misstatement of the financial statements will not be prevented or detected by the entity's internal control. We believe that the following deficiency constitutes material weakness. • Financial Reporting—During the 2006 audit we noted a material journal entry not detected by staff or management. COMMUNICATION TO AUDIT COMMITTEE OR ITS EQUIVALENT We have audited the financial statements of Truckee Donner Public Utility District for the year end December 31, 2006 and 2005 and have issued our report thereon dated April _, 2007. Professional standards require that we provide you with the following information related to our audit. OUR RESPONSIBILITY UNDER U.S. GENERALLY ACCEPTED AUDITING STANDARDS As stated in our engagement letter, our responsibility, as described by professional standards, is to plan and perform our audit to obtain reasonable, but not absolute, assurance that the financial statements are free of material misstatement and are fairly presented in accordance with U.S. generally accepted accounting principles. Because an audit is designed to provide reasonable, but not absolute assurance and because we did not perform a detailed examination of all transactions there is a risk that material misstatements may exist and not be detected by us. As part of our audit, we considered the internal controls of the district. Such considerations were solely for the purpose of determining our audit procedures and not to provide any assurance concerning such internal controls. Truckee Donner blic Utiilit April _, 2007 O Page 8 COMMUNICATION TO AUDIT COMMITTEE OR ITS EQUIVALENT (cont.) SIGNIFICANT ACCOUNTING POLICIES Management has the responsibility for selection and use of appropriate accounting policies. In accordance with the terms of our engagement letter, we will advise management about the appropriateness of accounting policies and their application. The significant accounting policies used by Truckee Donner Public Utility District are described in Note 1 to the financial statements. We noted no transactions entered into by Truckee Donner Public Utility District during the year that were both significant and unusual, and of which, under professional standards, we are required to inform you, or transactions for which there is a lack of authoritative guidance or consensus. ACCOUNTING ESTIMATES Accounting estimates are an integral part of the financial statements prepared by management and are based on management's knowledge and experience about past and current events and assumptions about future events. Certain accounting estimates are particularly sensitive because of their significance to the financial statements and because of the possibility that future events affecting them may differ significantly from those expected. AUDIT ADJUSTMENTS For purposes of this letter, professional standards define an audit adjustment as a proposed correction of the financial statements that, in our judgment, may not have been detected except through our auditing procedures. An audit adjustment may or may not indicate matters that could have a significant effect on the Truckee Donner Public Utility District's financial reporting process. Matters underlying adjustments proposed by the auditor could potentially cause future financial statements to be materially misstated. We proposed two adjustments during our fieldwork, none of which were material to the consolidated financial statements. All audit and bookkeeping adjustments we prepared were included in your financial statements. Copies of these adjustments have been included with this communication for your information. DISAGREEMENTS WITH MANAGEMENT For purposes of this letter, professional standards define a disagreement with management as a matter, whether or not resolved to our satisfaction, concerning a financial accounting, reporting, or auditing matter that could be significant to the financial statements or the auditor's report. We are pleased to report that no such disagreements arose during the course of our audit. CONSULTATIONS WITH OTHER INDEPENDENT ACCOUNTANTS In some cases, management may decide to consult with other accountants about auditing and accounting matters, similar to obtaining a "second opinion" on certain situations. If a consultation involves application of an accounting principle to the districts' financial statements or a determination of the type of auditors' opinion that may be expressed on those statements, our professional standards require the consulting accountant to check with us to determine that the consultant has all the relevant facts. To our knowledge, there were no such consultations with other accountants. O��F� � 0.t J4QOS�S Truckee Donner Public Ui�io April _, 2007 Page 9 COMMUNICATION TO AUDIT COMMITTEE OR ITS EQUIVALENT (cont.) ISSUES DISCUSSED PRIOR TO THIS YEAR'S AUDIT We generally discuss a variety of matters, including the application of accounting principles and auditing standards, with management each year prior to performing the audit. These discussions occurred in the normal course of our professional relationship and our responses were not a condition to the services performed as your auditor. DIFFICULTIES ENCOUNTERED IN PERFORMING THE AUDIT We encountered no significant difficulties in dealing with management in performing our audit. This information is intended solely for the use of board members and management and is not intended to be, and should not be, used by anyone other than these specified parties. CLOSING In closing, we would like to thank you for allowing us to serve you. We are very interested in the long-term success of Truckee Donner Public Utility District and our comments are intended to draw your attention to issues which need to be addressed for the district to meet its goals and responsibilities. We appreciate the assistance and courtesy we received from your staff. We are available to assist with any areas discussed in this letter. Feel free to contact us if you have any questions on the comments. Sincerely, VIRCHOW, KRAUSE & COMPANY, LLP TEUljas